Feb. 23 (Bloomberg) -- A Delaware judge’s public rebuke of
Barclays Plc over conflicts of interest in the sale of Del Monte
Foods Co. may become a calling card for boutique advisory firms
such as Rothschild and Greenhill & Co.

Barclays, which represented the fruit-juice and pet-food
company on its $5.3 billion sale to a KKR & Co.-led group,
deceived its client by failing to disclose until late in the
process plans to provide financing for the purchaser, Chancery
Court Judge J. Travis Laster said in a Feb. 14 opinion. Del
Monte would probably have hired another bank if it knew
Barclays, the U.K.’s third-largest bank, planned to “double-dip” for fees by working for the buyers, he wrote.

Wall Street’s independent advisory firms may seize on the
judge’s conclusions, which Barclays denies, to woo clients from
the larger banks that advise on, structure and finance
takeovers. Laster’s opinion will probably spur company boards to
hire independent advisers earlier in the sale process and could
make it more difficult for banks that try to work for both
buyers and sellers, academics and dealmakers said.

“This is a real slap in the face for the industry,” said
Roy Smith, a finance professor at New York University’s Stern
School of Business in Manhattan. “It says the directors need to
ask more about what their bankers are doing than in the past.”

Lazard Ltd., Greenhill & Co., and Evercore Partners Inc.
are the largest publicly traded advisory firms that don’t have
big businesses underwriting stocks and bonds or lending money.
Closely held rivals include Rothschild North America Inc.,
Perella Weinberg Partners LP, and Moelis & Co. The firms are all
based in New York.

Independent Advisers

Corporate boards need independent advisers especially when
dealing with private-equity funds as potential buyers because
the funds generate so much lucrative business for the banks,
said Scott Bok, chief executive officer of Greenhill.

“It’s hard to rely on the large investment banks to
vigorously represent your interests against those funds when
those funds are literally their most important clients,” said
Bok, who added that Greenhill was already expanding to take
advantage of the need for independent advice.

While it’s going to be “a lot harder now,” investment
bankers at the largest banks and securities firms will still
angle for deals in which they can play a role on both sides
because the payoff can be large, said Smith, a former partner at
Goldman Sachs Group Inc. Goldman was the most profitable
securities firm in Wall Street history before converting to a
bank in 2008.

Del Monte Deal

In the Del Monte case, Barclays stands to collect $23.5
million for advising the San Francisco-based company on its sale
and may earn $21 million to $24 million providing financing to
the buyer, Laster wrote. The London-based bank received about
$66 million in fees from KKR in the two years before the deal,
Laster noted.

The bank “secretly and selfishly manipulated the sale
process” to engineer a transaction that would allow it to
obtain fees from the buyers, Laster said.

Del Monte is “confident” it ran an auction designed to
get the best price for the company, spokeswoman Brandy Bergman
said. “We don’t comment on ongoing litigation,” said Peter
McKillop, a KKR spokesman. Del Monte shareholders have sued the
company’s board, KKR, Vestar Capital Partners and Barclays.

Del Monte said following the judge’s opinion it will seek
new offers and it hired Perella Weinberg to solicit potential
buyers. Perella, which had provided a fairness opinion to the
board, will be paid $1 million, a sum that could rise to $5
million if it can attract a higher bid.

Confidentiality Agreements

The judge attacked Barclays’s decision to let KKR, the New
York-based private equity firm started by Jerome Kohlberg, Henry
Kravis and George Roberts, hold talks about teaming up with New
York City-based Vestar Capital Partners -- a violation of both
buyout firms’ confidentiality agreements with Del Monte.

“What indisputably crossed the line was the surreptitious
and unauthorized pairing of Vestar with KKR,” Laster wrote.
“Barclays actively concealed the pairing from the Del Monte
board.”

Instead of relying on advisers to volunteer such
disclosures, boards are now more likely to hire independent
firms that don’t provide financing, said Peter Solomon, chairman
of Peter J. Solomon Co., a New York-based boutique investment
bank.

“The major firms have been doing this for 25 years,” said
Solomon. “This decision explains why you can’t trust those
firms. This lays it out bare, plain and simple.”

Provide Financing

Jill Goodman, the head of a group at Rothschild that
advises boards, said that at times it’s in a company’s interest
to enlist an adviser that can provide financing -- so long as
the board is informed and the funding is available to other
buyers so the bidding is competitive.

“I think they will look for advisers they can bring in who
will be independent and speak up, but who will not disrupt the
process just for the sake of it,” Goodman said in an interview.

In a memo sent to clients last week, the New York-based law
firm Cleary Gottlieb Steen & Hamilton LLP said that boards
should consider hiring a second banker to run the sale process
if the first adviser is offering buyer financing. The company
“may wish to consider asking the first investment bank to bear
some of the expense of the second firm’s fees under at least
some scenarios,” the law firm wrote.

Banks offer financing to bidders in part to win additional
work advising on takeovers for private-equity firms, which
typically borrow about two-thirds of the purchase price. The
deal work can also lead to follow-on assignments, such as
refinancing and asset sales.

JPMorgan, BofA

Barclays isn’t alone in providing loans to buyers: JPMorgan
Chase & Co., the second largest U.S. bank by assets, is advising
Jo-Ann Stores Inc. on its proposed $1.6 billion sale to Leonard
Green & Partners LP and is helping finance the buyer. Bank of
America Corp., the biggest U.S. lender by assets, advised NBTY
Inc., the maker of Nature’s Bounty nutritional supplements, on
its $3.8 billion sale to Carlyle Group last year and helped
provide financing.

“It’s nothing new, it’s just the first time a judge has
said the king has no clothes,” said Samuel L. Hayes III, a
professor emeritus of investment banking at the Harvard Business
School in Cambridge, Massachusetts. “The investment banking
business has been rife with undisclosed conflicts for a long
time. In an ideal world, they shouldn’t be permitted. But we’re
not in an ideal world.”

‘Appearance of Impropriety’

Judges have faulted the practice of advising buyer and
seller before. Credit Suisse First Boston, the predecessor of
Credit Suisse Group AG, was criticized in 2005 by Leo Strine,
another Delaware judge, for advising retailer Toys “R” Us on
its sale that year to a KKR-led group while taking $10 million
of fees for arranging financing for the buyers. While it created
the “appearance of impropriety” the bank did nothing wrong
because the loans were only arranged after the $7.5 billion
takeover was agreed, Strine said.

Independent advisory firms haven’t made gains in M&A league
tables since then. Lazard, the top-ranked independent adviser,
placed 10th last year, down from ninth in 2008, according to
data compiled by Bloomberg. Four boutique firms ranked among the
top 20 in 2010, down from six in 2008, the data show.

“Part of the debate in the post-financial crisis years has
been about how non-bank firms would get a larger share of the
M&A work due to their independent advice,” said Peter Hahn, a
professor at London’s Cass Business School. “Investment banks
that have funding in their back pocket still have a substantial
advantage over firms that don’t.”

Barclays Expands

Barclays is seeking to parlay its role as a financing
provider into work advising on mergers following its 2008
purchase of bankrupt Lehman Brothers Holdings Inc.’s U.S.
operations. The takeover expanded the lender’s investment
banking unit, Barclays Capital, beyond selling and trading fixed
income securities and foreign exchange and into equities and
deal advice. Robert Diamond, who led Barclays Capital since
1997, was named Barclays chief executive officer last month.

Barclays’s dealmaker on Del Monte was managing director
Peter J. Moses, a consumer banker in New York, according to
Laster’s opinion. The bank denies any wrongdoing, and “strongly
disagrees with characterizations that are based on an incomplete
factual record,” spokesman Mark Lane said.

While the judge’s public criticism is embarrassing for
Barclays, it probably won’t have a significant impact on the
firm, said Tom Kirchmaier, a fellow at the London School of
Economics. “Investment banks are surprisingly resilient to this
type of reputational effect,” he said.